How Farmland Investments Can Create Passive Income for Your Retirement
Most people are familiar with the concept of real estate investing, even if they choose not to include it in their investment strategy. Fewer people are aware of all the different types of real estate available to invest in, one of those being farmland.
As a real estate investment, farmland can help investors enjoy the benefits of real estate investing, but without some of the headaches associated with residential real estate. For several decades, investing in farmland has increased in popularity and provides a way for investors to get exposure to alternative investments for diversification, greater return potential, and passive income.
Why Farmland Can Be a Valuable Income-Producing Asset
Food, like housing, is a basic human need. And of course, land is required to produce food. There will always be a demand for farmland, making it a desirable investment for individuals looking to diversify their portfolios. A growing population and a limited amount of arable land make farmland an attractive investment opportunity.
Low Volatility
Americans are reckoning with high rates of inflation and subsequent diminished returns on equity assets as the long-term economic consequences of the Covid-19 pandemic continue to unfold. Farmland investments are one way investors may be able to hedge against inflation, as the producers of food products can actually benefit from inflated prices.
Additionally, farmland is historically less volatile than other asset classes. From 1992 through 2020, US farmland had an average volatility rate of 6.9% (compared to 17.5% for the S&P 500). One of the primary draws to farmland investments is the lack of correlation between the performance of this particular asset class and that of the stock market or residential real estate.
High Return Potential
Much of the value in farmland lies in capital appreciation. The USDA reported that farmland appreciated 7% in 2021. The year before showed a 7.8% increase in land value.
Perhaps most attractively, rent from farming operations and a percentage of earnings from crop yields may add to investor returns and even create a reliable stream of passive, consistent income. These factors, coupled with average rates of capital appreciation, mean that farmland has averaged 11.2% average annual returns from 1992 through 2020.
Adding income-producing assets to a retirement portfolio can offer investors peace of mind that even if their equity investments are down in a given year, they can still rely on monthly or annual income from other assets.
How to Invest in Farmland
Adding farmland to your portfolio of income-producing assets can be done in a few different ways. Like any other investment, it’s important to take into consideration the particulars of your circumstances and preferences to know which option is best suited for you. Important factors to consider include:
How much capital do you have to invest?
What level of involvement do you wish to have?
Is your priority lowering risk or increasing returns?
Buying Farmland Directly
Purchasing land directly is the most obvious way to invest in farmland, but it is neither cheap nor easy. According to the United States Department of Agriculture, the average cost per acre of cropland was $3,380 in 2021. Depending on the size of the parcel you want to buy, the cost can soar quickly.
If you’re considering purchasing farmland directly, it’s important to have at least a general understanding of agriculture. Managing farmland can be more complicated than residential real estate in many ways. Operational needs like irrigation, fencing, and water rights can be challenging issues to navigate.
Investing in farmland with a direct land purchase provides cash flow to the investor by way of rent from the farm operator. While monthly income is desirable, keep in mind that the capital investment will be highly illiquid. If you need easy access to your principal investment, purchasing land directly may not be the best way to invest in farmland.
Although the potential returns from leasing farmland that you own may be higher, the degree of difficulty can be off-putting to investors who prefer a more passive investment option. Individuals interested in lower capital investment and less direct involvement may consider crowdfunding or farmland-specific real estate investment trusts to be better avenues for investing in farmland.
Crowdfunding Platforms for Investing in Farmland
Crowdfunding is a way for individuals to invest funds towards a new business venture with other people. The pool of investors can be quite large and the minimum investment can be relatively low in comparison to land purchase.
Crowdfunding platforms like FarmFundr and AcreTrader are specifically designed for investing in farmland and give you the ability to invest in operations in the U.S. or abroad. The ability to invest in different geographical locations and various types of crops adds additional diversification to your portfolio.
This avenue of farmland investing gives individuals the opportunity to add this income-producing asset to their portfolio without having any hands-on responsibilities to the management of the asset.
To invest in crowdfunding projects like Farmfundr and AcreTrader, individuals have to be accredited investors. Based on SEC requirements, that means you need to either earn an income of $200,000 per year as an individual ($300,000 as a married couple) or have a net worth of more than $1 million. These regulations are in place to protect investors from the inherent risk associated with new businesses, as many do fail.
Invest in Farmland Through a Real Estate Investment Trust (REIT)
For individuals who aren’t accredited investors, real estate investment trusts are another great option to consider. REITs are companies that own real estate and allow individual investors to purchase stock in the company, giving them a percentage of ownership without having to get involved with the property directly. For many individuals, a farmland-specific real estate investment trust (F-REIT) is the best way to invest in farmland.
F-REITs are now available for those who want to invest in farmland and agricultural operations. REITs pay out dividends to their shareholders on a monthly, quarterly, or annual basis. Shareholders also benefit from long-term capital appreciation of the assets held within the REIT.
REITs are publicly traded companies and therefore do not require investors to be accredited. Individuals can buy shares in a REIT through a brokerage account. With no minimum purchase requirement, this is the most affordable and accessible option for investors to add farmland to their portfolio of income-producing assets.
How Chicago Trust Administration Services Can Help You Add Farmland to Your Investment Portfolio
Adding a variety of income-producing assets to your investment portfolio can help you generate additional cash flow while increasing diversification and minimizing risk. But investing in alternative assets with tax-advantaged retirement contributions can be tricky. To do so, you need a self-directed IRA.
At Chicago Trust Administration Services, we help investors make fast, IRS-compliant transactions to add alternative investments to their retirement portfolio and ultimately pursue better outcomes for retirement. To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.
___________________________________________________________________________
*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.